Lessons from the Sharks on Pitching a Fund

A provocative elevator pitch has long been prized in sales. But in the hedge fund world of predators and prey, pitches need to be stellar to avoid swimming with the fishes. ABC’s hit show, Shark Tank, based on the original Canadian series, Dragon’s Den, offers several notable tips on delivering a better pitch for investment capital.

Shark Tank’s website description for obtaining start-up investment lifeblood is deceptively simple: The entrepreneurs who dare to enter the “Shark Tank” must try to convince the tough, self-made tycoons to part with their own hard-earned cash and give them the funding they desperately need to jumpstart their business ideas. But these Sharks have a goal, too. They want a return on their investment and to own a piece of the next big business idea. In exchange for the Sharks’ cash investment, the entrepreneurs give up a percentage of their companies’ equity. When the Sharks hear a great idea, they’re ready to fight each other for a piece of it. The once-desperate entrepreneur can rejoice in the fact that the Sharks find value in their product, service, or business. But if the pitch is poor, the Sharks will tear into the ill-prepared presenters and pass on the idea with a simple “I’m out!”

The entrepreneurs have only a few minutes to convince the Sharks that their business is ready to take off. Typically they stand next to a display of the product and rattle off standard pitch details in QVC-style: name of business, what it does, why it works, and how much capital they are seeking from the Sharks to grow to the next level. This takes 90 seconds or so in TV time, close to a typical elevator pitch. The interchange that follows from the Sharks is illuminating for the typical hedge fund start-up trying to become a business.

The Sharks then begin to circle the prey (entrepreneur) and fire off a series of questions, which the entrepreneur must navigate successfully or the dreaded “I’m out!” will propel a Shark out of the tank of potential funding. These questions focus on essential business viability issues that ultimately determine whether or not a Shark believes taking on the risk of the project is worth its potential pay-off.

The first question is invariably about the current valuation of the business and what proof the entrepreneur can offer to justify the amount. The Sharks will be lending based on this information, and negotiating for a

Lessons from the Sharks on Pitching a Fund (continued)

piece of the business equity. If the answers to these issues fall short, the potential deal is dead in the water. A hedge fund business hopeful should take note of this critical point when seeking angels and seeders, as alternative investors often offer to take an equity slice of somewhere between 10-50%, with the negotiated split averaging 15-25%. This is partially determined by the fund strategy, how crowded it is, and what the investment appetite is likely to be going forward for it in the alternatives space. Hedge fund business owners needs to consider in advance if they will be able to meet the payback schedule and exactly what their tolerance is for equity sharing prior to negotiating these issues with an investor.

Second, the Sharks will challenge the entrepreneur to define what their plan is for scaling up the business. This typically includes distribution issues, strategic partnerships, patent developments (if appropriate), and the clarity of the marketing message. The entrepreneur gets mere seconds to address each of these items in front of the Sharks, but hedge fund business owners should be prepared to address these same topics with an investor as directly. They need to show that they have a solid understanding of all facets of building a business, and have already considered the factors they are being assessed on prior to seeking investment capital.

Third, if the entrepreneur has survived the Sharks’ initial probes, the next issue they likely face is how well they can take in criticism of their business model and adapt on the fly to the Sharks’ suggestions for change. Often the Sharks, savvy business opportunists all, zero in on the weak points that present the biggest obstacles to overcome. They attempt to determine if the entrepreneur has the clarity of vision and business acumen to accept change and input from a potential equity partner. A hedge fund business hopeful will need to possess these skills as well, given that cooperation and negotiation are essential to gaining an investor partner.

Finally, if the entrepreneur has made it through the process, the Sharks who are interested in owning a piece of the business will make their bid. The entrepreneur then faces an exciting but nerve-racking negotiation with an investor (Shark) who has more experience (been there, done that), more leverage (cash), and more control over the outcome (“I’m out!”). The crux of the deal often comes down to the ownership percentage that must be given up. The amount of cash to be lent to the entrepreneur is incidental to the Shark; they have cash to lend to generate a preferred rate of return, and no shortage of solicitors for their business to deploy it. What gets the Sharks thrashing amongst themselves is the unknown upside potential, as represented by their equity stake in the fledgling business.

This is where the novice entrepreneur, or hedge fund business hopeful, should be prepared to compromise. The goal is to balance giving up the least amount of equity with avoiding the killing of the deal. Giving up a 20% stake in a new business may be vastly preferable to walking away with no deal and 100% of a failure to thrive. Hedge fund hopefuls need to spend some serious time considering these pitching and negotiating issues prior to finding themselves in front of a shark. The objective is on creating the best chance possible to obtain the investment or risk ending up swimming with the fishes at the bottom of the capital pool.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.